At the start of December 2021, Xanadu Mines announced a significant update to its Kharmagtai copper-gold project in Mongolia. After completing 120 diamond drill holes for 69,479 metres since the last resource upgrade in 2018, the new mineral resource estimate (MRE) exceeded 1 billion tonnes – an aspirational target maintained by the ASX and TSX-listed company since it began exploring the 40km2 porphyry district in the vast South Gobi Desert several years prior. The current 1.1 billion tonnes mineral resource contains 3 million tonnes (Mt) of contained copper and 8 million ounces (Moz) of contained gold, with a notable 100 Mt higher grade core at 0.8% copper equivalent. At the time, CEO Andrew Stewart said the MRE positioned Kharmagtai as one of the largest undeveloped copper and gold resources on the ASX, and one of the biggest globally. Speaking to RGN in the new year, he highlighted the importance of the high-grade core: “When you see these copper systems, they can be big and low grade. But it’s the ones that have that gold-rich core that are interesting, and we saw that at Kharmagtai. We knew the system would get past those hurdles of what we see is a Tier 1 asset and we are very pleased to hit that upgrade after all the drilling we’ve done over the last three to four years.”
The key benefit of having a high-grade core in a large, low grade porphyry system like Kharmagtai is derived in project economics, Stewart explains. This type of project is intrinsically high capex, but a strong gold-copper ratio can reduce the payback period and improve the financial model.
“If you can get your gold credits into early production, that allows you to bring back that payback period, which is critically important for any copper project around the world and it’s a key differentiator for our Kharmagtai project.”
Developing a Tier 1 project
The mention of a ‘Tier 1 asset’ is all too common in the mining sector these days, however the phrasing looks appropriate in the case of Kharmagtai. Going by Mark Bristow’s definition of a Tier 1 asset as having 5 Moz in contained gold or 5 Mt in contained copper, Xanadu’s flagship project is well on the way to achieving Tier 1 status.
While the short-term focus will fall on growing the high-grade core to improve the economics of the initial open pit mine, there exists significant upside potential at depth. The company has identified drilling below 400 metres as an opportunity to link porphyry deposits, building out the underground development which will follow the 10-year open pit at Kharmagtai.
Stewart is confident that Xanadu can continue to add incremental gains to the mineral resource and feels that the project is ready to be fleshed out with clearer economics. A scoping study is currently underway with a view to it being gated towards a pre-feasibility study (PFS).
The scoping study will evaluate key advantages of the project including the high-grade zones, low capital intensity, favourable ESG factors and close proximity to markets.
“We were busily working on optimisations before Christmas and hope to see a big chunk of the 1 billion tonnes resource sitting within the open cut. We’re looking to report on the first phases of that work before the end of Q1 this year,” says Stewart.
Code red for copper
The smooth delivery of Xanadu’s Tier 1 project draws added importance from the gaping supply-demand dynamics taking hold in the copper market. Rapidly building demand from the renewable energy and electric vehicle (EV) segments of the global clean energy push has been met by an unprecedented paucity of greenfield copper discoveries over the last decade.
Markets have already responded to this escalating global supply crisis, with the copper price breaching US$10,000 per tonne last year. More recently, global copper inventories dropped to just over 200,000 ounces – barely enough to cover three days of worldwide consumption.
Investment bank Goldman Sachs was even compelled to warn of an ‘extreme scarcity episode’ by the end of the year, while reiterating its bullish forecast for copper to average $11,875 a tonne in 2022, rising steadily to $15,000 during 2025.
“We’re seeing a market that is incredibly strong and there’s a lot of demand for copper right now. I only see that growing because we’re not effectively replacing the copper that’s being used today,” Stewart stresses.
“We remain reliant on a couple of very old, very deep mines in Chile, and we know it takes a long time and a lot of capital to build these projects. So, we see that copper price being stronger for longer until these new projects like Kharmagtai come online.”
Low ESG risk
The global copper supply pipeline has also been impacted in recent years by new projects being slowed down – or even halted entirely – by local and federal complaints, typically with regards to social and environmental issues.
However, in a sparsely populated country like Mongolia, and with a simple open pit project like Kharmagtai, Xanadu has little to worry about when it comes to ESG risk. This has not stopped the company from doing what it should in terms of broad-based ESG compliance (its annual sustainability report was first published in 2020), in spite of the ESG-friendly project fundamentals.
“We are looking at a project where we have built a strong relationship with the community we work around. We have a shallow, conventional mine with conventional metallurgy and no arsenic. We have very well developed water resources and power nearby.”
Stewart also highlights the speed of project development in Mongolia, referencing the nearby Oyu Tolgoi mine discovered by Robert Friedland in the early 2000s. By 2013, Rio Tinto – in partnership with the Mongolian government – had advanced the mega-project into production.
“I don’t know too many other projects in the world that have advanced that rapidly,” he says. After the recent resolution of an economic dispute with the government, Rio is moving forward with the $6.93 billion underground expansion project at Oyu Tolgoi.
“In the next few years, we’ll see one of the largest copper projects in the world developed, and that’s happened in relatively quick time. It’s great to see.” Xanadu’s own fully permitted mining licence with 30 years tenure for Kharmagtai provides a strong basis for the company to begin rapidly advancing Kharmagtai through the feasibility stages.
God’s gift to explorers
Xanadu recently took part in the Future Minerals Forum in Saudi Arabia, a new industry event that aims to shine a light on the opportunities available in ‘frontier’ mining jurisdictions stretching from Africa to the Middle East and central Asia. In a corporate pitch at the event, Stewart described Mongolia as ‘god’s gift to explorers’ – a nod to the opportunity for discoveries in the underexplored terrain of the Gobi Desert.
Put simply, the chances of similar greenfield discoveries in mature exploration settings like Australia or South America are significantly smaller, and miners there are typically compelled to dig deeper into existing deposits at ever increasing costs.
And after the huge success of the Oyu Tolgoi development, the Mongolian government has realised the economic potential that lays dormant in its substantial mineral reserves, and is actively supporting explorers and mine developers who can deliver substantial local employment opportunities.
A favourable 25% corporate income tax regime has encouraged foreign direct investment into the country, with 27 projects currently being operated by listed mining and exploration companies seeking the next big discovery.
“We can only draw attention to what’s happening in this part of the world, and there’s certainly a lot happening in terms of infrastructure projects. It’s an exciting place to be, a good place to have discoveries and it goes back to that ESG footprint.
“We’re in the most sparsely populated country in the world. There’s very little vegetation in the South Gobi, good water resources and you’re on the doorstep of the world’s biggest consumer in China.”
The next step in the journey
Looking back over the last decade during which Xanadu has operated in Mongolia, Stewart reflects on the ups and downs that are to be expected in any frontier environment before expressing an overall contentment with the company’s position in one of the world’s most exciting geological districts.
“We have the ability to move quickly, drill holes and there’s no bureaucracy in the exploration process. I think it’s a real advantage for a small company. We have a very large copper-gold project and our drilling costs are a fraction of what you get around the world.”
And after the latest upgrade to the mineral resource, Stewart believes that the Kharmagtai project possesses all the ingredients coveted by a larger player that could provide the funding assistance required to get the globally significant copper-gold project off the ground.
“In my experience when you have this type of discovery, it creates interest and people line up to see them and certainly fund them,” Stewart confidently concludes.